Optimal pricing and inventory policy with order cancelations under the cash-on-delivery payment scheme

Considering a periodic review system where the online seller allows the customers to pay when the products are delivered to them (referred as cash-on-delivery payment scheme in this paper), the authors investigate the seller’s joint pricing and inventory control policy with a finite planning horizon. In particular, the authors incorporate the customers’ possible order cancellation behavior with the cash-on-delivery scheme. It can be proven that the base-stock list price policy is optimal under mild conditions. The authors also analyze the impact of the customers’ forward looking behavior on the optimal policy.